While cost optimization should be a priority for all companies regardless of the economic cycle, the reality is that when times are good, it's on the back burner, and during a downturn, it becomes critical. Before handing out those pink slips, finance executives would be well-advised to take a holistic look at their organizations to ensure that any changes they propose are strategic and sustainable.
The Changing Role of CFOs
There is no question that the role of the CFO has evolved significantly over the past few years. As finance departments have moved from an inward-looking function focused on financial reporting and controls to one focused on improving business performance, CFOs have begun to play a more strategic and operational role within their organizations. As organizations are being asked by their stakeholders to improve performance, enhance revenue, optimize costs, and reduce risk, CFOs today have a tremendous amount of responsibility to deliver. Indeed, operations improvement, growth, and business risk have become equally pressing for the CFO.
With this broader perspective, CFOs should now be better prepared to tackle cost optimization from a strategic, enterprise-wide perspective. While it may be easy to see how a more strategic approach to cost management is integral to a CFO's expanded responsibilities, the difficulty lies in actually achieving the desired results.
Common Cost Optimization Pitfalls
According to a 2007 KPMG survey of more than 400 companies worldwide, 9 out of 10 cost reduction programs fail to achieve their targets, and gains that are achieved are typically short-lived. Here are some of the most common pitfalls:
• Cost drivers are not clear. Companies need more insight into what drives costs in their business to ensure that cost-cutting is targeted at the right places and that the success of cost management initiatives is properly measured.
• Cost strategies are too cautious. Companies often pick the easy options for cost initiatives, rather than the ones that will yield the most savings. While budget and head count reductions provide short-term cost savings, reducing complexity and improving process efficiency can yield significant and lasting benefits, but only if they are conducted rigorously. Companies must also be prepared to adopt major changes to their business models in order to remain competitive.
• Cost discipline is not embedded in the culture. Every person at a company has a role in cost management, but responsibilities are typically unclear in many organizations. A clear strategy and open communication are vital to the success of any corporate project, but even more so around cost-cutting initiatives, where employees understandably can feel threatened by change.
No Quick Fixes
Fundamentally, one of the first things that executives need to change when approaching cost optimization is their mind-set. It helps to think of cost-cutting in terms of a weight-loss program -- you may temporarily lose weight on a crash diet, but in order to maintain an ideal weight, you must adopt a healthy lifestyle and diet over the long term. Similarly, only executives who take the time to examine the cost structure throughout their business and embed cost discipline within their organization's culture will see gains that can be sustained over the long term.
To do this, finance executives need to look at costs across whole processes, not just within functions. Ultimately, this means rethinking the entire business model around lower costs, possibly taking out whole layers of the organization or supply chain, examining customer interfaces, and considering outsourcing, shared services, and offshoring. The focus should be on creating a leaner, more efficient organization, with cost reduction as the consequence, not necessarily the target.
As part of this holistic view of costs, managers need to take responsibility for change beyond their own department, and employee rewards around cost incentives must align with the business strategy.
While it may seem obvious, generating reliable cost data is crucial in order to make strategic decisions and measure improvements. Therefore, IT not only plays a role in this area, decision-making, but also is critical to many cost reduction solutions.
Of course, it's easy to grasp for the quick fix when Wall Street and shareholders are looking for answers, and undoubtedly some organizations are sure to repeat past mistakes. But CFOs who remain focused on the big picture will see lasting results.